the probability of triggering the primary lender’s loan covenan

问题如下：

Gension directs Smittand to prepare asset allocation and portfolio characteristics data on three alternative portfolios. The fund’s risk profile is one factor that potential lenders consider when assigning a risk rating to the university. A loan covenant with the university’s primary lender states that a re-evaluation of the university’s creditworthiness is triggered if the fund incurs a loss greater than 20% over any one-year period. Smittand states that the recommended asset allocation should achieve the following three goals, in order of priority and importance:

• Minimize the probability of triggering the primary lender’s loan covenant.

• Minimize the probability of purchasing power impairment over a 10-year horizon.

• Maximize the probability of achieving a real return target of 6% over a 10-year horizon.

Smittand provides data for three alternative portfolios, which are presented in Exhibits 1 and 2.

Exhibit 1 Asset Allocation

Notes:

• One-year horizon 99% VaR: the lowest return over any one-year period at a 99% confidence level

• One-year horizon 99% CVaR: the expected return if the return falls below the 99% VaR threshold

• Probability of purchasing power impairment: the probability of losing 40% of the fund’s purchasing power over 10 years, after consideration of new gifts received by the fund, spending from the fund, and total returns

Based on Exhibit 2, which alternative portfolio should Gension recommend for the fund given Smittand’s stated three goals?

选项：

A.

Portfolio A

B.

Portfolio B

C.

Portfolio C

解释：

A is correct. Among the three portfolios, Portfolio A minimizes the probability of triggering the primary lender’s loan covenant, which is the highest-priority goal, because it has the lowest one-year 99% CVaR, –19.4%. Portfolio A also has the lowest probability of purchasing power impairment over a 10-year horizon (2.5%). While Portfolio A has the lowest probability of achieving a real return target of 6% over a 10-year horizon (56.1%), that is the least important goal to be met. Therefore, Gension should recommend Portfolio A for the fund.

B is incorrect because Portfolio B has a one-year 99% CVaR of –20.6%, which crosses the loan covenant threshold of a 20% loss. Portfolio A is the only one that satisfies the most important goal and is the portfolio least likely to trigger the loan covenant. Since Portfolio B does not achieve the most important goal of minimizing the probability of triggering the primary lender’s loan covenant, Portfolio B should not be the recommended portfolio.

C is incorrect because despite the fact that Portfolio C has the highest probability of meeting the 6% real return over a 10-year horizon, 61.0%, it also has a one-year 99% CVaR of –22.7% and thus the highest probability of triggering the loan covenant. Portfolio A is the only one that satisfies the most important goal and is the portfolio least likely to trigger the loan covenant. Since Portfolio C does not achieve the most important goal of minimizing the probability of triggering the primary lender’s loan covenant, Portfolio C should not be the recommended portfolio.